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Don’t Take My Word For It…

By Paul S. Hamann

Mid-summer is a good time to take a break and share what others are saying about Reasonable Compensation.  This month I have assembled some of the most recent and poignant reports on Reasonable Compensation for Shareholder-Employees of S Corps from some big name publications, your peers and our government – Enjoy…

The IRS Targets Income Tricks (The Wall Street Journal)

Tom Ochsenschlager, former head of tax for the American Institute of CPAs, says pay and payroll tax issues are a frequent source of friction with clients: ‘Sometimes you have to take them to the woodshed and say, ‘You need to report more income as  pay for personal services.’ Read the Article…

S Corporation Shareholder Compensation: How Much Is Enough? (The Tax Advisor)
S corporation shareholder-employees and their tax advisers often find themselves with differing goals when setting the shareholder-employee’s compensation. Typically, the shareholder-employee prefers to minimize compensation in favor of distributions to reduce payroll taxes. Tax advisers, however, are faced with a body of governing authority providing that the shareholder-employee cannot avoid the imposition of payroll taxes by forgoing reasonable compensation. Read the Article…

Taxes from A to Z: U Is For Unreasonable Compensation (Forbes)
I don’t love S corporations. I know that my CPA friends love, love them but I don’t. While I agree that they have advantages in terms of flexibility, many shareholders struggle with compliance putting the S status at risk. And even more concerning? The IRS isn’t a fan. And by isn’t a fan, I mean that they’re looking at S corporation returns with increased scrutiny. Read the Article…

Reasonable salary for S corporation owners (Journal of Accountancy)
The U.S. Government Accountability Office reported in 2009 on employment tax noncompliance among S corporation shareholders. The IRS has been pursuing this perceived abuse of inadequate compensation in favor of dividend distributions to shareholder-employees and has won a number of cases. Read the Article…

Reasonable compensation for S corp shareholders (Accounting Today)
One of the continuing advantages of the S corporation format over taxation of partnerships and LLCs is the ability to treat a portion of payments from an S corporation as being return on invested capital not subject to employment taxes. Studies continue to indicate that many S corporations are fairly aggressive in the amount of S corporation earnings that are treated as shareholder distributions, rather than employee compensation. Read the Article…

The Recommended Adjustments From S Corporation Audits Are Substantial… (TIGTA)
IRS statistics show that in FYs 2007 through 2011, SB/SE Division examiners completed 53,544 audits of S corporation returns and recommended $5.7 billion in adjustments to items reported on those returns. This was a 54 percent increase over the number of S corporation returns the IRS audited in the previous five-year period (FYs 2002 through 2006). For each return audited in FYs 2007 through 2011, examiners generated about $105,534 in recommended adjustments… Read the Article…

The Top Ten Tax Cases Of 2012, #4: S Corporation Shareholder Reasonable Compensation (Forbes)
#4: Watson v. Commissioner, 668 F.3d 1008 (8th Cir., 2012). The courts offer a guide to determining an S corporation shareholder/employee’s “reasonable compensation.” Read the Article…

Wage Compensation for S Corporation Officers (IRS)
Corporate officers are specifically included within the definition of employee for FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax Act) and federal income tax withholding under the Internal Revenue Code. Read the Article…

Eight Small Business IRS Audit Areas to Watch Through 2013 #7 S Corps… (IRS Nationwide Tax Forum)
The IRS continually analyzes compliance levels for entities, issues and industries by conducting hundreds of compliance projects and initiatives each year. Leading up to the start of the government’s fiscal year on Oct. 1, the IRS has announced emerging or significant areas that it will prioritize for the coming year. When it comes to compliance, the IRS has increasingly focused on small business under-reporting, which is responsible for 84% of the $450 billion tax gap. Read the Article…

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